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Cebu CPAR CENTER

Mandaue City, Cebu
AUDITING PROBLEMS
PREWEEK LECTURE
PROBLEM NO. 1
The following accounts were included in the unadjusted trial balance of Pit!n C!"#any
as of December 31, 2006:
Cash P !1,600
"ccounts recei#able 1,12$,000
%erchandise in#entor& 3,02',000
"ccounts (a&able 2,100,'00
)ther current liabilities 21','00
During &our audit, &ou noted that Pistons held its cash boo*s o(en after &ear+end so that a
more fa#orable balance sheet could be (re(ared for credit (ur(oses, Cash recei(ts and
disbursements for the first 10 da&s of -anuar& were recorded as December transactions,
The following information is gi#en:
1, -anuar& cash recei(ts recorded in December cash boo* totaled P32$,300, of which
P1!0,0'0 re(resents cash sales and P1$,2'0 re(resents collections on account for
which cash discounts of P$,$'0 were gi#en,
2, -anuar& cash disbursements recorded in the December chec* register li.uidated
accounts (a&able of P1!6,200 on which discounts of P6,200 were ta*en,
3, The amount shown as in#entor& was determined b& (h&sical count on December 31,
2006,
QUESTIONS:
/ased on the abo#e and the result of &our audit, answer the following:
1, The adjusted cash balance as of December 31, 2006 is
a, P!1,600 b, P33,300 c, P30,'00 d, P36,$00
2, The adjusted wor*ing ca(ital as of December 31, 2006 is
a, P2,31$,600 b, P2,130,100 c, P2,13,$'0 d, P2,36!,000
3, The adjusted current ratio as of December 31, 2006 is
a, 2,00 b, 1,!' c, 1,!6 d, 2,11
, During &our e1amination of a cut+off ban* statement, &ou noticed that the majorit& of
chec*s listed as outstanding at December 31 had not cleared the ban*, This would
indicate
a, " high (ossibilit& of *iting,
b, " high (ossibilit& of la((ing,
c, That the cash disbursement journal had been held o(en (ast December 31,
d, That the cash disbursement journal had been closed (rior to December 31,
', %a*ing the financial statements indicate a more fa#orable (osition b& gi#ing effect to
transactions in a (eriod other than that in which these actuall& occurred is called
a, Pro+forma balance sheet, c, 2a((ing,
b, 3inancial (rojections, d, 4indow dressing,
PROBLEM NO. $
)n -anuar& 10, 200$, &ou started the audit of the financial records of the %eat C!"#any
for the &ear ended December 31, 2006, 3rom &our in#estigation, &ou disco#ered the
following:
AP&PW '()*
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1, The boo**ee(er also acts as the cashier, )n December 31, 2006, the boo**ee(er5s
&ear+end cash reconciliation contains the following items,
Cash (er ledger, 12+31+06 P01,200
Cash (er ban*, 12+31+06 '1!,!00
)utstanding chec*s 1,$60
%iami Co, chec* charge b& ban* in error
12+20+066 corrected b& ban* on 1+'+0$ 1,200
Cash in transit, credited b& ban* on 1+2+0$ ',$60
2, The cash account balances (er ledger as of 12+31+06 were: Cash + P01,2006 (ett&
cash + P1,200
3, The count of the cash on hand at the close of business on -anuar& 10, 200$,
including the (ett& cash, was as follows:
Currenc& and coin P3,0!0
71(ense #ouchers 160
7m(lo&ees5 8)95s dated 1+'+0$ 0
Customers5 chec*s in (a&ment of account 2,320
P6,000
, 3rom -anuar& 2, 200$ to -anuar& 10, 200$, the date of &our cash count, total cash
recei(ts a((earing in the cash records were P6!,!00, "ccording to the ban*
statement for the (eriod from -anuar& 2, 200$ to -anuar& 10, 200$, total credits were
P60,!00,
', )n -ul& ', 2006, cash of P3,200 was recei#ed from an account customer6 the
"llowance for Doubtful "ccounts was charged and "ccounts :ecei#able credited,
6, )n December ', 2006, cash of P2,00 was recei#ed from an account customer6
8n#entor& was charged and "ccounts :ecei#able credited,
$, Cash of P',!0 recei#ed during 2006 was not recorded,
!, Chec*s recei#ed from customers from -anuar& 2, 200$ to -anuar& 10, 200$, totaling
P3,360, were not recorded but were de(osited in ban*,
0, )n -ul& 1, 2006, the ban* refunded interest of P160 because a note of the ;eats
Com(an& was (aid before maturit&, <o entr& had been made for the refund,
10, 8n the cashier5s (ett& cash, there were recei(ts for collections from customers on
-anuar& 0, 200$, totaling P6,!006 these were unrecorded and unde(osited,
11, 8n the outstanding chec*s, there is one for P00 made (a&able to a trade creditor6
in#estigation shows that this chec* had been returned b& the creditor on -une 1,
2006 and a new chec* for P!00 was issued in its (lace6 the original chec* for P00
was made in error as to amount,
QUESTIONS:
/ased on the abo#e and the result of &our audit, answer the following:
1, Correct ban* balance as of December 31, 2006 is
a, P!,00 b, P'03,200 c, P!,000 d, P!3,200
2, Cash shortage as of December 31, 2006 is
a, P10,200 b, P1!,!00 c, P1!,00 d, P0
3, Cash shortage for the (eriod -anuar& 1 to 10, 200$ is
a, P13,360 b, P20,320 c, P10,160 d, P0
, 3rom the stand(oint of good internal control, the monthl& ban* statements should be
reconciled b& someone under the direction of the
a, Controller, b, Treasurer, c, Cashier, d, Credit manager,
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', "n auditor would consider a cashier5s job descri(tion to contain com(atible duties if
the cashier recei#es remittance from the mailroom and also (re(ares the
a, Dail& de(osit sli(, c, :emittance ad#ices,
b, Prelist of indi#idual chec*s, d, %onthl& ban* reconciliation,
PROBLEM NO. +
Net C!"#any (roduces (aints and related (roducts for sale to the construction industr&
throughout %etro %anila, 4hile sales ha#e remained relati#el& stable des(ite a decline in
the amount of new construction, there has been a noticeable change in the timeliness with
which the com(an&5s customers are (a&ing their bills,
The com(an& sells its (roducts on (a&ment terms of 2=10, n=30, 8n the (ast, o#er $'
(ercent of the credit customers ha#e ta*en ad#antage of the discount b& (a&ing within 10
da&s of the in#oice date, During the &ear ended December 31, 200', the number of
customers ta*ing the full 30 da&s to (a& has increased, Current indications are that less
than 60> of the customers are now ta*ing the discount, 9ncollectible accounts as a
(ercentage of total credit sales ha#e risen from the 1,'> (ro#ided in the (ast &ears to >
in the current &ear,
8n res(onse to &our re.uest for more information on the deterioration of accounts
recei#able collections, the com(an&5s controller has (re(ared the following re(ort:
Net C!"#any
A,,!unt Re,ei-ab.e C!..e,ti!n
December 31, 2006
The fact that some credit accounts will (ro#e uncollectible is normal, and annual bad
debt write+offs had been 1,'> of total credit sales for man& &ears, ;owe#er, during
the &ear 2006, this (ercentage increased to >, The accounts recei#able balance is
P1,'00,000, and the condition of this balance in terms of age and (robabilit& of
collection is shown below:
Pro(ortion to total "ge of accounts Probabilit& of collection
6> 1 ? 10 da&s 00,0>
1!> 11 ? 30 da&s 0$,'>
!> Past due 31 ? 60 da&s 0',0>
'> Past due 61 ? 120 da&s !0,0>
3> Past due 121 ? 1!0 da&s 6',0>
2> Past due o#er 1!0 da&s 20,0>
"t the beginning of the &ear, the "llowance for Doubtful "ccounts had a credit
balance of P2$,300, The com(an& has (ro#ided for a monthl& bad debt e1(ense
accrual during the &ear based on the assum(tion that > of total credit sales will be
uncollectible, Total credit sales for the &ear 2006 amounted to P!,000,000, and
write+offs of uncollectible accounts during the &ear totaled P202,'00,
QUESTIONS:
/ased on the foregoing, answer the following:
1, ;ow much is the adjusted balance of the allowance for doubtful accounts as of
December 31, 2006@
a, P10,00 b, P0,!00 c, P$$,100 d, P2$,300
2, The necessar& adjusting journal entr& to adjust the allowance for doubtful accounts
as of December 31, 2006 would include a credit to allowance for doubtful accounts of:
a, P2$,300 b, P0,!00 c, P$$,100 d, P22,300
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3, "n aging anal&sis of accounts recei#able would (ro#ide an indication as to the
a, Aalidit& of the accounts, c, 8ntegrit& of the credit grantors,
b, Collectibilit& of the accounts, d, Bol#enc& of customers,
, 3rom the stand(oint of good internal control, the billing de(artment, for good internal
control should be under directions of the
a, Credit manager, c, Controller,
b, Bales manager, d, Treasurer,
', 8n order that sound internal accounting control could be achie#ed, which de(artment
should (erform the acti#ities of matching shi((ing documents with sales orders and
(re(aring dail& sales summaries@
a, /illing b, Credit c, Bhi((ing d, Bales order,
PROBLEM NO. /
8n connection with &our e1amination of the financial statements of Ca-a.ie0, In,, for the
&ear ended December 31, 2006, &ou were able to obtain certain information during &our
audit of the accounts recei#able and related accounts,
The December 31, 2006 balance in the "ccounts :ecei#able control accounts is
P''!,600,
"n aging schedule of the accounts recei#able as of December 31, 2006 is (resented
below:
"ge
<et debit
balance
Percentage to be a((lied after
corrections ha#e been made
60 da&s C under P2'!,'13 1 (ercent
61 to 00 da&s 20,$3' 3 (ercent
01 to 120 da&s '0,!!6 6 (ercent
)#er 120 da&s 3',66
P''!,600
Definitel& uncollectible, P6,3006 the
remainder is estimated to be 2'>
uncollectible,
Two entries were made in the Doubtful "ccounts 71(ense account were:
1, " debit on December 31 for the amount of the credit to the "llowance for Doubtful
"ccounts,
2, " credit for P,110 on <o#ember 30, 2006, and a debit to "llowance for Doubtful
"ccounts because of a ban*ru(tc&, The related sales too* (lace on )ctober 1,
2006,
The "llowance for Doubtful "ccounts schedule is (resented below:
Debit Credit /alance
-anuar& 1, 2006 P13,12'
<o#ember 30, 2006 P,110 0,01'
December 31, 2006 DP''!,600 1 '>E
P2$,030 P36,0'
There is a credit balance in one account recei#able D61 to 00 da&sE of P$,2606 it
re(resents an ad#ance on a sales contract,
QUESTIONS:
/ased on the abo#e and the result of &our audit, answer the following:
1, ;ow much is the adjusted balance of "ccounts :ecei#able as of December 31,
2006@
a, P''','0 b, P''0,'60 c, P'0,030 d, P'!,100
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2, ;ow much is the adjusted balance of the "llowance for Doubtful "ccounts as of
December 31, 2006@
a, P10,$06 b, P10,'!3 c, P10,!30 d, P10,1$
3, ;ow much is the Doubtful "ccounts e1(ense for the &ear 2006@
a, P16,001 b, P16,!6! c, P1$,11' d, P2$,030
, ;ow much is the net adjustment to the Doubtful "ccounts e1(ense account@
a, P6,0'2 credit b, P6,$0' credit c, P6,!20 credit d, P,110 debit
', "uthoriFation for the write+off of accounts recei#able should be the res(onsibilit& of
the
a, Credit %anager, c, "ccounts recei#able cler*,
b, Controller, d, Treasurer,
PROBLEM NO. '
Wi1a0d Ente0#0ie loaned P1,000,000 to 4ashington 8nc, on -anuar& 1, 200, The
terms of the loan re.uire (rinci(al (a&ments of P200,000 each &ear for ' &ears (lus
interest at !>, The first (rinci(al and interest (a&ment is due on -anuar& 1, 200',
4ashington made the re.uired (a&ments during 200' and 2006, ;owe#er, during 2006
4ashington began to e1(erience financial difficulties, re.uiring 4iFards to reassess the
collectibilit& of the loan, )n December 31, 2006, 4iFards determines that the remaining
(rinci(al (a&ments will be collected, but the collection of interest is unli*el&, The (re#ailing
interest rate for similar t&(e of note as of December 31, 2006 is 10>,
QUESTIONS:
/ased on the abo#e and the result of &our audit, answer the following:
1, The (resent #alue of the e1(ected future cash flows as of December 31, 2006 is
a, P'$,100 b, P'1',00 c, P''6,60 d, P600,000
2, The loan im(airment for the &ear 2006 is
a, P!,600 b, P3,360 c, P'2,000 d, P0
3, ;ow much is the interest income for the &ear 200$, assuming that 4iFardsG
assessment of the collectibilit& of the loan has not changed,
a, P2$,$6! b, P2!,'31 c, P2',232 d, P32,000
, 4hich of the following audit (rocedures (ro#ides the best e#idence about the
collectibilit& of notes recei#able@
a, Confirmation of note recei#able balances with the debtors,
b, 71amination of notes for a((ro(riate debtorsG signatures,
c, 71amination of cash recei(ts records to determine (rom(tness of interest and
(rinci(al (a&ments,
d, :econciliation of the detail of notes recei#able and the (ro#ision for uncollectible
amounts to the general ledger control,
', 4hen auditing the allowance for uncollectible accounts, the least reliance should be
(laced on which of the following@
a, The credit managerGs o(inion,
b, "n aging of (ast due accounts,
c, Collection e1(erience of the clientGs collection agenc&,
d, :atios that show the (ast relationshi( of the allowance to net credit sales,
AP&PW '()*
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PROBLEM NO. *
Pa,e0 C!"#any, a manufacturer of small tools, (ro#ided the following information from
its accounting records for the &ear ended December 31, 2006:
8n#entor& at December 31, 2006 Dbased on (h&sical count on
December 31, 2006E P1,'20,000
"ccounts (a&able at December 31, 2006 1,200,000
<et sales Dsales less sales returnsE !,1'0,000
"dditional information follows:
a, 8ncluded in the (h&sical count were tools billed to a customer 3)/ shi((ing (oint on
December 31, 2006, These tools had a cost of P31,000 and were billed at P0,000,
The shi(ment was on Pacers5 loading doc* waiting to be (ic*ed u( b& the common
carrier,
b, Hoods were in transit from a #endor to Pacers on December 31, 2006, The in#oice
cost was P$1,000, and the goods were shi((ed 3)/ shi((ing (oint on December 20,
2006,
c, 4or* in (rocess in#entor& costing P30,000 was sent to an outside (rocessor for
(lating on December 30, 2006,
d, Tools returned b& customers and held (ending ins(ection in the returned goods area
on December 31, 2006, were not included in the (h&sical count, )n -anuar& !, 200$,
the tools costing P32,000 were ins(ected and returned to in#entor&, Credit memos
totaling P$,000 were issued to the customers on the same date,
e, Tools shi((ed to a customer 3)/ destination on December 26, 2006, were in transit
at December 31, 2006, and had a cost of P21,000, 9(on notification of recei(t b& the
customer on -anuar& 2, 200$, Pacers issued a sales in#oice for P2,000,
f, Hoods, with an in#oice cost of P2$,000, recei#ed from a #endor at ':00 (,m, on
December 31, 2006, were recorded on a recei#ing re(ort dated -anuar& 2, 200$, The
goods were not included in the (h&sical count, but the in#oice was included in
accounts (a&able at December 31, 2006,
g, Hoods recei#ed from a #endor on December 26, 2006, were included in the (h&sical
count, ;owe#er, the related P'6,000 #endor in#oice was not included in accounts
(a&able at December 31, 2006, because the accounts (a&able co(& of the recei#ing
re(ort was lost,
h, )n -anuar& 3, 200$, a monthl& freight bill in the amount of P6,000 was recei#ed,
The bill s(ecificall& related to merchandise (urchased in December 2006, one+half of
which was still in the in#entor& at December 31, 2006, The freight charges were not
included in either the in#entor& or accounts (a&able at December 31, 2006,
QUESTIONS:
/ased on the abo#e and the result of &our audit, answer the following:
1, The adjusted balance of 8n#entor& as of December 31, 2006 is
a, P1,6$3,000 b, P1,$0,000 c, P1,6$2,000 d, P1,6$0,000
2, The adjusted balance of "ccounts Pa&able as of December 31, 2006 is
a, P1,333,000 b, P1,262,000 c, P1,32$,000 d, P1,330,000
3, The adjusted <et Bales fro the &ear ended December 31, 2006 is
a, P!,103,000 b, P!,110,000 c, P!,1'0,000 d, P!,063,000
AP&PW '()*
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, 4hen auditing merchandise in#entor& at &ear end, the auditor (erforms a (urchase
cutoff test to obtain e#idence that
a, "ll goods (urchased before &ear end are recei#ed before the (h&sical in#entor&
count,
b, <o goods held on consignment for customers are included in the in#entor&
balance,
c, "ll goods owned at &ear end are included in the in#entor& balance,
d, <o goods obser#ed during the (h&sical count are (ledged or sold,
', 4hich of the following audit (rocedures would (ro#ide the least reliable e#idence that
the client has legal title to in#entories@
a, "nal&tical re#iew of in#entor& balances com(ared to (urchasing and sales
acti#ities,
b, Confirmation of in#entories at locations outside the clientGs facilities,
c, )bser#ation of (h&sical in#entor& counts,
d, 71amination of (aid #endorsG in#oices,
PROBLEM NO. 2
" flood recentl& destro&ed man& of the financial records of Bu.. Manu3a,tu0in4
C!"#any, %anagement has hired &ou to re+create as much financial information as
(ossible for a month of -ul&, Iou are able to find out that the com(an& uses an a#erage
cost in#entor& #aluation s&stem, Iou also learn that /ulls ma*es a (h&sical count at the
end of each month in order to determine monthl& ending in#entor& #alues, /& e1amining
#arious documents &ou are able to gather the following information:
7nding in#entor& at -ul& 31 '0,000 units
Total cost of unit a#ailable for sale in -ul& P11!,!00
Cost of goods sold during -ul& P00,000
Cost of beginning in#entor&, -ul& 1 P0,3' (er unit
Hross (rofit on sales for -ul& P101,000
-ul& (urchases
Date 9nits 9nit Cost
-ul& ' 60,000 P0,0
11 '0,000 0,1
1' 0,000 0,2
16 '0,000 0,'
QUESTIONS:
/ased on the abo#e and the result of &our engagement, &ou are as*ed to (ro#ide the
following information:
1, <umber of units on hand, -ul& 1
a, 3',000 b, 1,'!0 c, P12,2'0 d, 100,000
2, 9nits sold during -ul&
a, 1!',000 b, 162,2'0 c, P2'0,000 d, 101,'!0
3, 9nit cost of in#entor& at -ul& 31
a, P0,'06 b, P0,306 c, P0,'60 d, P0,02
, Aalue of in#entor& at -ul& 31
a, P2',300 b, P10,!00 c, P2!,000 d, P2,600
', 8n obtaining e#idence to establish the e1istence of in#entories, which one of the
following is unli*el& to be used b& and auditor@
a, :econciliation, b, 8ns(ection, c, )bser#ation, d, Confirmation,
AP&PW '()*
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PROBLEM NO. 5
/oth /B" 8nc, and CP" Cor(, ha#e 1,000,000 shares of no+(ar common stoc*
outstanding, Bu,6 In,. ac.uired 100,000 shares of /B" stoc* for P' (er share and
2'0,000 shares of CP" stoc* for P10 (er share on -anuar& 2, 200', /oth securities are
being held as long term in#estments, Changes in retained earnings for /B" and CP" for
200' and 2006 are as follows:
/B", 8nc, CP" Cor(,
:etained earnings DdeficitE, 1=1=0' P2,000,000 DP3'0,000E
Cash di#idends, 200' D2'0,000E +
<et income, 200' 00,000 6'0,000
:etained earnings, December 31, 200' 2,1'0,000 300,000
Cash di#idends, 2006 D300,000E D100,000E
<et income, 2006 600,000 2'0,000
:etained earnings, December 31, 2006 P2,'0,000 P '0,000
%ar*et #alue of stoc*: 12=31=0' P$,00 P12,00
12=31=06 6,'0 1',00
QUESTIONS:
/ased on the abo#e and the result of &our audit, answer the following:
1, The income from in#estment in /B", 8nc, in 2006 is
a, P30,000 b, P2',000 c, P2,000 d, P0
2, The income from in#estment in CP", 8nc, in 200' is
a, P62,'00 b, P',000 c, P162,'00 d, P0
3, The carr&ing #alue of 8n#estment in /B", 8nc, as of December 31, 2006 is
a, P'00,000 b, P6'0,000 c, P$00,000 d, P'0',000
, The carr&ing #alue of 8n#estment in CP", 8nc, as of December 31, 2006 is
a, P2,'00,000 b, P3,$'0,000 c, P2,'3$,'00 d, P2,$00,000
', ;ow much is the unrealiFed gain or loss that will be included as com(onent of e.uit&
as of December 31, 2006@
a, P1'0,000 gain b, P'0,000 gain c, P'0,000 loss d, P0
PROBLEM NO. 7
8n connection with &our e1amination of the financial statements of the S#u0 C!0#!0ati!n
for the &ear 2006, the com(an& (resented to &ou the Pro(ert&, Plant and 7.ui(ment
section of its balance sheet as of December 31, 200' which consists of the following:
2and P 00,000
/uildings 3,200,000
2easehold im(ro#ements 2,000,000
%achiner& and e.ui(ment 2,!00,000
The following transactions occurred during 2006:
2and site number 102 was ac.uired for P,000,000, "dditionall&, to ac.uire the land
B(urs (aid a P20,000 commission to a real estate agent, Costs of P60,000 were
incurred to clear the land, During the course of clearing the land, timber and gra#el
were reco#ered and sold for P20,000,
AP&PW '()*
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" second tract of land Dsite number 103E with a building was ac.uired for P1,200,000,
The closing statement indicated that the land #alue was P!00,000 and the building
#alue was P00,000, Bhortl& after ac.uisition, the building was demolished at a cost
of P120,000, " new building was constructed for P600,000 (lus the following costs:
71ca#ation fees P ,000
"rchitectural design fees 32,000
/uilding (ermit fee ,000
8m(uted interest on funds used during construction 2,000
The building was com(leted and occu(ied on Be(tember 1, 2006,
" third tract of land Dsite number 10E was ac.uired for P2,00,000 and was (ut on
the mar*et for resale,
71tensi#e wor* was done to a building occu(ied b& B(urs under a lease agreement,
The total cost of the wor* was P'00,000, which consisted of the following:
Particulars "mount 9seful life
Painting of ceilings P 0,000 )ne &ear
7lectrical wor* 10,000 Ten &ears
Construction of e1tension to
current wor*ing area 320,000 Thirt& &ears
The lessor (aid one+half of the costs incurred in connection with the e1tension to the
current wor*ing area,
During December 2006, costs of P260,000 were incurred to im(ro#e leased office
s(ace, The related lease will terminate on December 31, 200!, and is not e1(ected
to be renewed,
" grou( of new machines was (urchased under a ro&alt& agreement which (ro#ides
for (a&ment of ro&alties based on units of (roduction for the machines, The in#oice
(rice of the machines was P300,000, freight costs were P!,000, unloading charges
were P6,000, and ro&alt& (a&ments for 2006 were P'2,000,
QUESTIONS:
/ased on the abo#e and the result of &our audit, com(ute for the following as of December
31, 2006:
1, 2and
a, P!,00,000 b, P',000,000 c, P',!0,000 d, P6,000,000
2, /uildings
a, P,2!0,000 b, P3,!!0,000 c, P3,!00,000 d, P,200,000
3, 2easehold im(ro#ements
a, P2,$20,000 b, P2,600,000 c, P2,'60,000 d, P2,300,000
, %achiner& and e.ui(ment
a, P3,100,000 b, P3,10!,000 c, P3,11,000 d, P3,166,000
', 8n testing (lant and e.ui(ment balances, an auditor e1amines new additions listed on
an anal&sis of (lant and e.ui(ment, This (rocedure most li*el& obtains e#idence
concerning management5s assertion of
a, Com(leteness, c, Presentation and disclosure,
b, 71istence or occurrence, d, Aaluation or allocation,
AP&PW '()*
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PROBLEM NO. 1)
The following inde(endent situations describe facts concerning the ownershi( of #arious
assets, 8n each case, com(ute the amount of de(reciation or de(letion for 2006,
1, Buns Com(an& (urchased a tooling machine in 1006 for P600,000, The machine
was being de(reciated on the straight+line method o#er an estimated useful life of 20
&ears with no sal#age #alue, "t the beginning of 2006, when the machine had been
in use for 10 &ears, Buns (aid P120,000 to o#erhaul the machine, "s a result of this
im(ro#ement, Buns estimated that the useful life of the machine would be e1tended
an additional ' &ears,
a, P2!,000 b, P1',000 c, P20,000 d, P23,000
2, Phoeni1 %anufacturing Co,, a calendar+&ear com(an&, (urchased a machine for
P6'0,000 on -anuar& 1, 200, "t the date of (urchase, Phoeni1 incurred the fol +
lowing additional costs:
2oss on sale of old machiner& P1',000
3reight cost ',000
8nstallation cost 20,000
Testing costs (rior to regular o(eration ,000
The estimated sal#age #alue of the machine was P'0,000, and Phoeni1 estimated
that the machine would ha#e a useful life of 20 &ears, with de(reciation being
com(uted using the straight+line method, 8n -anuar& 2006, accessories costing
P!,600 were added to the machine to reduce its o(erating costs, These
accessories neither (rolonged the machineGs life nor did the& (ro#ide an& additional
sal#age #alue,
a, P31,'0 b, P3,1'0 c, P33,!!0 d, P36,030
3, )n -ul& 1, 2006, <ash Cor(oration (urchased e.ui(ment at a cost of P30,000, The
e.ui(ment has an estimated sal#age #alue of P30,000 and is being de(reciated o#er
an estimated life of ! &ears under the double+declining+balance method of
de(reciation,
a, P$$,'00 b, P3!,$'0 c, P2,'00 d, P!',000
, 8n -anuar& 2006, %arion Cor(oration entered into a contract to ac.uire a new
machine for its factor&, The machine, which had a cash (rice of P2,000,000, was
(aid for as follows:
Down (a&ment P 300,000
',000 shares of %arion common stoc* with an
agreed+u(on #alue of P3$0 (er share 1,!'0,000
P2,1'0,000
Prior to the machineGs use, installation costs of P$0,000 were incurred, The machine
has an estimated useful life of 10 &ears and an estimated sal#age #alue of P100,000,
The straight+line method of de(reciation is used,
a, P212,000 b, P1!20,000 c, P100,000 d, P10$,000
', )n -anuar& 2, 200', Diaw Cor(oration (urchased land with #aluable natural ore
de(osits for P10 million, The estimated residual #alue of the land was P2 million, "t
the time of (urchase, a geological sur#e& estimated 2 million tons of remo#able ore
were under the ground, 7arl& in 200', roads were constructed on the land to aid in
the e1traction and trans(ortation of the mined ore at a cost of P$'0,000, 8n 200',
'0,000 tons were mined, 8n 2006, Diaw fired its mining engineer and hired a new
e1(ert, " new sur#e& made at the end of 2006 estimated 3 million tons of ore were
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a#ailable for mining, 8n 2006, 1'0,000 tons were mined, "ll the ore mined was sold,
a, P3$2,000 b, P26,000 c, P33,'00 d, P06,'00
PROBLEM NO. 11
)n -anuar& 1, 200', Nu44et C!"#any entered into a lease contract with Den#er
Com(an& for a new e.ui(ment that had a selling (rice of P2,120,000, The lease contract
(ro#ides that annual (a&ments of P20,000 will be made for 6 &ears, <uggets made the
first (a&ment on -anuar& 1, 200', subse.uent (a&ments are made on -anuar& 1 of each
&ear, <uggets guarantees a residual #alue of P36$,122 at the end of the lease term, "fter
considering the guaranteed residual #alue, the rate im(licit in the lease is determined to be
12>, <uggets has an incremental borrowing rate of 1'>, The economic life of the
e.ui(ment is 0 &ears, <uggets de(reciates its e.ui(ment using straight line method,
QUESTIONS:
/ased on the abo#e and the result of &our audit, com(ute for the following:
1, Cost of the leased e.ui(ment to be recogniFed b& <uggets Com(an&
a, P1,012,$$2 b, P2,013,00! c, P2,120,000 d, P0
2, "nnual de(reciation e1(ense
a, P2'$,60! b, P202,16 c, P2$,6 d, P0
3, 8nterest e1(ense in 200'
a, P1$0,133 b, P101,260 c, P20,000 d, P0
, 2iabilit& under finance lease as of December 31, 2006
a, P1,2'1,00' b, P1,!,000 c, P1,36',1$$ d, P0
', Current (ortion of the liabilit& under finance lease as of December 31, 2006
a, P21,020 b, P260,$$1 c, P2'6,1$0 d, P0
PROBLEM NO. 1$
Iou were able to obtain the following from the accountant for Ma-e0i,6 C!0#, related to
the com(an&5s liabilities as of December 31, 2006,
"ccounts (a&able P 6'0,000
<otes (a&able ? trade 100,000
<otes (a&able ? ban* !00,000
4ages and salaries (a&able 1',000
8nterest (a&able @
%ortgage notes (a&able ? 10> 600,000
%ortgage notes (a&able ? 12> 1,'00,000
/onds (a&able 2,000,000
The following additional information (ertains to these liabilities,
a, "ll trade notes (a&able are due within si1 months of the balance sheet date,
b, /an* notes+(a&able include two se(arate notes (a&able to "llied /an*,
D1E " P300,000, !> note issued %arch 1, 200, (a&able on demand, 8nterest is
(a&able e#er& si1 months,
D2E " 1+&ear, P'00,000, 11 J> note issued -anuar& 2, 2006, )n December 30,
2006, %a#eric*s negotiated a written agreement with "llied /an* to re(lace the
note with a 2+&ear, P'00,000, 10> note to be issued -anuar& 2, 200$, The
interest was (aid on December 31, 2006,
c, The 10> mortgage note was issued )ctober 1, 2003, with a term of 10 &ears, Terms
of the note gi#e the holder the right to demand immediate (a&ment if the com(an& fails
to ma*e a monthl& interest (a&ment within 10 da&s of the date the (a&ment is due, "s
of December 31, 2006, %a#eric*s is three months behind in (a&ing its re.uired interest
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(a&ment,
d, The 12> mortgage note was issued %a& 1, 2000, with a term of 20 &ears, The current
(rinci(al amount due is P1,'00,000, Princi(al and interest (a&able annuall& on "(ril
30, " (a&ment of P220,000 is due "(ril 30, 200$, The (a&ment includes interest of
P1!0,000,
e, The bonds (a&able is 10+&ear, !> bonds, issued -une 30, 100$, 8nterest is (a&able
semi+annuall& e#er& -une 30 and December 31,
QUESTIONS:
/ased on the abo#e and the result of &our audit, answer the following:
1, 8nterest (a&able as of December 31, 2006 is
a, P1'',000 b, P13,000 c, P203,000 d, P21',000
2, The (ortion of the <ote Pa&able+ban* to be re(orted under current liabilities as of
December 31, 2006 is
a, P300,000 b, P'00,000 c, P!00,000 d, P0
3, Total current liabilities as of December 31, 2006 is
a, P3,0'0,000 b, P,13!,000 c, P3,03!,000 d, P3,00!,000
, Total noncurrent liabilities as of December 31, 2006 is
a, P1,$60,000 b, P2,'60,000 c, P3,060,000 d, P1,060,000
', 4hich of the following is correct regarding the classification of financial liabilities@
a, "n entit& classifies financial liabilities as noncurrent when the& are due to be
settled within 12 months after the balance sheet date,
b, 8f the entit& e1(ects, and has the discretion, to refinance or roll o#er an obligation
for at least 12 months after the balance sheet date under an e1isting loan facilit&, it
classifies obligation as current,
c, 4hen refinancing or rolling o#er is not at the discretion of the entit&, the (otential
to refinance is not considered and the obligation is classified as current,
d, 4hen an entit& breaches an underta*ing under a long+term loan agreement on or
before the /B date with the effect that the liabilit& becomes (a&able on demand,
the liabilit& is classified as non+current, if, after the /B date, and before the 3B are
authoriFed for issue, the lender has agreed not to demand (a&ment as a
conse.uence of the breach,
PROBLEM NO. 1+
G0i11.ie In,. was organiFed on -anuar& 2, 200', with authoriFed ca(ital stoc* of '0,000
shares of 10>, P200 (ar #alue (referred, and 200,000 shares of no+(ar, no stated #alue
common, During the first 2 &ears of the com(an&Gs e1istence, the following selected
transactions too* (lace:
200'
-an, 2 Bold 10,000 shares of common stoc* at P16,
2 Bold 3,000 shares of (referred stoc* at P216,
%ar, 2 Bold common stoc* as follows: 10,!00 shares at P226 2,$00 shares at P2',
-ul, 10 "c.uired a nearb& (iece of land, a((raised at P00,000, for 600 shares of
(referred stoc* and 2$,000 shares of common, DPreferred stoc* was recorded at
P216, the balance being assigned to common,E
Dec, 16 Declared the regular (referred di#idend and a P1,'0 common di#idend,
2! Paid di#idends declared on December 16,
31 The 8ncome Bummar& account showed a credit balance of P'0,000,
2006
3eb, 2$ :eac.uired 12,000 shares of common stoc* at P10,
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-un, 1$ :esold 10,000 shares of the treasur& stoc* at P23,
-ul, 31 :esold all of the remaining treasur& stoc* at P1!,
Be(, 30 Bold 11,000 additional shares of common stoc* at P21,
Dec, 16 Declared the regular (referred di#idend and a P0,!0 common di#idend,
2! Di#idends declared on December 16 were (aid,
31 The income summar& account showed a credit balance of P2',000,
QUESTIONS:
/ased on the abo#e and the result of &our audit, determine the balances of the following
as of December 31, 2006:
1, Preferred stoc*
a, P$$$,600 b, P600,000 c, P$20,000 d, P$20,600
2, Common stoc*
a, P61',000 b, P066,'00 c, P$3','00 d, P606,100
3, "dditional (aid in ca(ital
a, P3!,000 b, P03,600 c, P'$,600 d, P0',600
, Total stoc*holders5 e.uit&
a, P2,0!,1'0 b, P2,3!!,1'0 c, P1,!02,100 d, P2,3$6,630
', "n auditor usuall& obtains e#idence of shareholders5 e.uit& transactions b& re#iewing
the entit&5s
a, %inutes of board of directors meetings, c, Canceled stoc* certificates,
b, Transfer agent5s records, d, Treasur& stoc* certificate boo*,
PROBLEM NO. 1/
C.i##e0 C!0#!0ati!n as*ed &ou to re#iew its records and (re(are corrected financial
statements, The boo*s of accounts are in agreement with the following balance sheet:
C.i##e0 C!0#!0ati!n
Ba.an,e S8eet
De,e"be0 +1, $))*
"ssets
Cash P 0,000
"ccounts recei#able !0,000
<otes recei#able 2,000
8n#entories 200,000
Total assets P3,000
2iabilities and )wners5 7.uit&
"ccounts (a&able P 16,000
<otes (a&able 32,000
Ca(ital stoc* !0,000
:etained earnings 216,000
Total liabilities and owners5 e.uit& P3,000
" re#iew of the com(an&5s boos indicates that the following errors and omissions had not
been corrected during the a((licable &ears:
2003 200 200' 2006
7nding in#entor& + o#erstated P + P'6,000 P6,000 P +
7nding in#entor& + understated !,000 + + $2,000
Pre(aid e1(ense $,200 ',600 ,000 ,!00
9nearned income + 3,200 + 2,00
"ccrued e1(ense 1,600 600 !00 00
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"ccrued income + 1,000 + 1,200
<o di#idends were declared during the &ears 2003 to 2006 and no adjustments were made
to retained earnings, The com(an&5s boo*s re(orted the following net income:
2003 P60,000 200' P'2,000
200 ,000 2006 60,000
QUESTIONS:
/ased on the abo#e and the result of &our audit, determine the adjusted amounts of the
following: (Disregar !a" i#$%i&a!io's(
1, <et income in 2003
a, P00,200 b, P113,600 c, P116,!00 d, P1$,600
2, <et income DlossE in 200
a, DP62,!00E b, DP1,!00E c, DP'0,600E d, P1',200
3, <et income DlossE in 200'
a, P60,00 b, P,!00 c, P,00 d, DP11,600E
, <et income DlossE in 2006
a, DP$6,000E b, P10,00 c, P10',200 d, P106,000
', :etained earnings as of December 31, 2006
a, P2!1,600 b, P201,200 c, P202,000 d, P1$,200
& end !3 #0e9ee6 .e,tu0e&
GOOD LUCK!
SOLUTION GUIDE TO SELECTED PROBLEMS:
PROBLEM NO. 1
Per boo*s "djustments Per audit
Current assets
Cash !1,600
"ccounts recei#able 1,12$,000
%erchandise in#entor& 3,02',000
,633,600
Current liabilities
"ccounts (a&able 2,100,'00
)ther current liabilities 21','00
2,316,000
4or*ing ca(ital DC"+C2E 2,31$,600
Current ratio DC"=C2E 2,00
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PROBLEM NO. $
/an* /oo*s
9nadjusted balances, 12=31=06
"dd DdeductE adjustments:
)utstanding chec*s
7rroneous ban* debit
Cash in transit
Collection charged to "llow, 3or Doubtful a=cs
Collection charged to 8n#entor&
9nrecorded cash recei(t
9nrecorded interest refund
Chec* returned and re(laced not &et cancelled
/alances
Bhortage
"djusted balances
PROBLEM NO. +
Categor& "ging ratio ": /alance :ate "llowance
1 ? 10 da&s
6> 1,00>
11 ? 30 da&s
1!> 2,'0>
31 ? 60 da&s
!> ',00>
61 ? 120 da&s
'> 20,00>
121 ? 1!0 da&s
3> 3',00>
o#er 1!0 da&s
2> !0,00>
100> 1,'00,000
PROBLEM NO. /
H2=B2 60 61 to 00 01 to 120 o#er 120
9nadjusted balances ''!,600
"dd DdeductE adjustments:
"-7 <o, 1
"-7 <o, 2
"-7 <o, 3
"djusted balances
PROBLEM NO. '
Date Collection Period PA factor PA at !>
-anuar& 1, 200$ 200,000 0
-anuar& 1, 200! 200,000 1
-anuar& 1, 2000 200,000 2
600,000
PROBLEM NO. *
8n#entor& "ccts, Pa&able <et Bales
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9nadjusted balances 1,'20,000 1,200,000 !,1'0,000
"dd DdeductE adjustments:
a
b
c
d
e
f
g
h
"djusted balances
PROBLEM NO. 2
Cost of units a#ailable for sale
2ess (urchases:
-ul& ' D60,000 units 1 P0,0E
-ul& 11 D'0,000 units 1 P0,1E
-ul& 1' D0,000 units 1 P0,2E
-ul& 16 D'0,000 units 1 P0,'E
Cost of beginning in#entor&
Di#ide b& cost (er unit
<umber of units on hand, -ul& 1
PROBLEM NO. 5
"c.uisition cost D2'0,000 shares 1 P10E
Bhare in net income for 200' DP6'0,000 1 2'>E
Carr&ing #alue, 12=31=0'
Di#idends recei#ed in 2006 DP100,000 1 2'>E
Bhare in net income for 2006 DP2'0,000 1 2'>E
Carr&ing #alue, 12=31=06
PROBLEM NO. 7
/alance, -anuar& 1, 2006
2and site number 102:
"c.uisition cost
Commission (aid to real estate agent
Clearing costs
"mounts reco#ered
2and site number 103:
"c.uisition cost
Demolition cost
/alance, December 31, 2006
PROBLEM NO. 1)
Cost of natural resources, net of residual #alue DP10% + P2%E
%ine im(ro#ements
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Cost subject to de(letion
Di#ide b& total estimated reser#es in 200'
De(letion rate in 200'
<umber of tons mined in 200'
De(letion for 200'
)riginal cost subject to de(letion
2ess de(letion in 200'
:emaining cost to de(lete, 1=1=06
:emaining tons of ore, 1=1=06 D3,000,000K1'0,000E
De(letion rate in 2006
<umber of tons mined in 2006
De(letion for 2006
PROBLEM NO. 11
Present #alue of rental (a&ments DP20,000 1 ,60!E
Present #alue of H:A DP36$,122 1 0,'066E
Cost of leased e.ui(ment
Date Pa&ment 8nterest Princi(al 2ease liab,
01,01,0'
01,01,0' 20,000
01,01,06 20,000
01,01,0$ 20,000
01,01,0! 20,000
01,01,00 20,000
01,01,10 20,000
01,01,11 36$,122
PROBLEM NO. 1$
P300,000 note (a&able to ban* DP300,000 1 !> 1 =12E
%ortgage note (a&able ? 10> DP600,000 1 10> 1 3=12E
%ortgage note (a&able ? 12> DP1,'00,000 1 12> 1 !=12E
Total interest (a&able, 12=31=06
PROBLEM NO. 1+
Preferred
stoc*
Common
stoc* "P8C
:etained
earnings
Treasur&
stoc*
8ssuance of CB, 1=2=0'
8ssuance of PB, 1=2=0'
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8ssuance of CB, 3=2=0'
8ssuance of PB and CB for land, $=10=0'
Declared cash di#idend+PB and CB, 12=16=06
<et income for 200'
/alances, 12=31=0' $20,000 $3','00 '$,600 302,2'0 +
"c.uisition of TB, 2=2$=06
:esale of TB abo#e cost, 6=1$=06
:esale of TB below cost, $=31=06
8ssuance of CB, $=31=0'
Declared cash di#idend+PB and CB, 12=16=06
<et income for 2006
/alances, 12=31=06
PROBLEM NO. 1/
<8 <8 <8 <8 :7
$))+ $))/ $))' $))* 1$.+1.)*
9nadjusted balances 60,000
,000
'2,000 60,000 216,000
1; 7nding in#entor& + o#erstated
200
200'
$; 7nding in#entor& + understated
2003
2006
+; Pre(aid e1(ense
2003
200
200'
2006
/; 9nearned income
200
2006
'; "ccrued e1(ense
2003
200
200'
2006
*; "ccrued income
200
2006
"djusted balances
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